Tuesday, February 20, 2007

JetBlue's Blues

In fact, the entire industry’s laserlike focus on low fares is a big reason why airline profits are often razor-thin in a good year, and, over the long haul, nonexistent. And JetBlue’s particularly low fares force competitors—who’ve usually been around a lot longer and thus have to pay for things like pensions that JetBlue doesn’t have to worry about yet—to push their fares down, too. The older airlines solve this problem by declaring bankruptcy once in a while, pushing costs onto three groups: workers, who get lower-than-agreed pensions; the federal government, since the government must make up for some of the pension shortfall; and shareholders, who lose the value of their stock.

Neeleman promises that JetBlue will regroup from last week’s chaos by designing new rules to compensate future stranded customers. Further, the company probably will reimburse last week’s beleaguered travelers at a much greater rate than the government requires, which might help counter some of the bad press the company has earned. Naturally, Neeleman also said JetBlue will invest in its communications system to avoid future disarray.

But all of those costs should result in higher fares at JetBlue, creating an excellent opportunity for the next JetBlue: an upstart airline that comes out of nowhere and offers crazily low fares, which it can do only because it has no legacy costs and chooses to underinvest in its vital infrastructure. Given a choice, if history is any guide, customers will vote their short-term interest, taking the lower fare and leaving theoretical problems to the future.